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P.C. v. Lexington Insurance Co.

United States Court of Appeals, Fifth Circuit

October 18, 2018

JOHN M. O'QUINN, P.C., doing business as O'Quinn & Laminack; JOHN M. O'QUINN & ASSOCIATES, L.L.P., doing business as O'Quinn & Laminack; JOHN M. O'QUINN LAW FIRM, P.L.L.C.; O'QUINN & LAMINACK, Plaintiffs-Appellants,
v.
LEXINGTON INSURANCE COMPANY, Defendant-Appellee.

          Appeal from the United States District Court for the Southern District of Texas

          Before REAVLEY, OWEN, and SOUTHWICK, Circuit Judges.

          PRISCILLA R. OWEN, Circuit Judge

         This case arises from a fee dispute about litigation expenses that an arbitration panel found attorneys had improperly allocated to their clients. John M. O'Quinn P.C., doing business under the name of other law firms that included the O'Quinn name (to whom we will refer collectively as "O'Quinn") represented many clients as plaintiffs in litigation against breast implant manufacturers and obtained substantial awards for those clients through settlements. Martha Wood and others were among those plaintiffs, and they subsequently became embroiled in a dispute with O'Quinn regarding the nature and amount of litigation expenses that O'Quinn deducted from the settlement amounts paid to each plaintiff. The matter proceeded to arbitration, a class was certified by the arbitration panel, and $41, 465, 950 was awarded to the class (to whom we will refer as the "Wood plaintiffs"). A state trial court affirmed the award. O'Quinn appealed but settled with the Wood plaintiffs while that appeal was pending, paying them $46, 500, 000. O'Quinn then sought to recover $15, 000, 000 of that amount from its primary and excess professional liability insurance carriers. The primary insurer paid its full policy limits of $5, 000, 000. This appeal concerns the claims against the excess insurer, Lexington Insurance Company (Lexington), for $10, 000, 000 in policy limits. In a lengthy and thorough opinion, the district court concluded that there was no coverage under the terms of the excess policy. We affirm the district court's judgment.

         I

         O'Quinn represented plaintiffs in suits against breast implant manufacturers on a 40% contingency fee basis. The Wood plaintiffs, their expert witnesses who testified during the arbitration, and the arbitration panel all agreed that "O'Quinn obtained extraordinary results" for the Wood plaintiffs in the breast implant litigation. O'Quinn's contingency fee for representing those plaintiffs, approximately $263.4 million, reflects that success. The Wood plaintiffs have never contended that O'Quinn was negligent or committed legal malpractice in the course of the breast implant litigation. They have contended only that certain expenses incurred by O'Quinn should not have been deducted by O'Quinn from their settlement proceeds and that as an additional consequence, the contingency fees paid to O'Quinn were more than 40% of their respective recoveries.

         The breast implant cases pursued by O'Quinn were consolidated for pretrial and discovery purposes. O'Quinn deposed expert and other witnesses whose testimony was relevant in each of the Wood plaintiffs' cases and allocated those and a host of other costs and expenses that O'Quinn labeled as Breast Implant General Expenses (BI General Expenses) among all clients by deducting 1.5% from each client's settlement. Some of those clients sued O'Quinn for failing to disclose in writing how it calculated and deducted BI General Expenses from settlement proceeds. Ultimately, the Wood plaintiffs asserted and prevailed upon breach-of-contract and breach-of-fiduciary claims against O'Quinn in arbitration proceedings. We consider in more detail below the nature of those claims and the arbitrators' findings and awards.

         As noted above, a state trial court affirmed the arbitration award, and more than two years after the arbitrators' decision had issued, while an appeal of the state court's judgment was pending, O'Quinn settled with the Wood plaintiffs, paying them $46.5 million. O'Quinn contends that it was motivated to settle because its primary and excess professional liability insurers had refused to provide coverage, and post-judgment interest on the state-court judgment affirming the arbitration award was mounting at $11, 000 per day. O'Quinn asserts that $5 million of the $46.5 million of the settlement payment was for post-judgment interest.

         While the Wood suit remained pending, the primary insurer brought a diversity suit in federal district court seeking a declaratory judgment that it had no duty to defend or indemnify O'Quinn in the Wood litigation. O'Quinn counterclaimed seeking a defense from the primary carrier and indemnity from both the primary and excess carriers. The district court ruled that the primary carrier owed a defense and stayed the indemnity issues pending resolution of the Wood litigation. After the Wood suit was settled, the litigation in federal court between O'Quinn and its insurance carriers resumed. O'Quinn filed a motion for summary judgment arguing that the insurance policies obligated all "Insurance Companies" to indemnify O'Quinn for its "Losses" but in the section of the motion addressing "Defense Costs" named only the primary insurer. The primary and excess insurers filed motions seeking summary judgment in their favor. Before the district court ruled on any of the motions, O'Quinn settled with its primary carrier, which paid its policy limits of $5, 000, 000.

         The district court denied O'Quinn's motion for summary judgment and granted Lexington's summary judgment motion, determining that Lexington had no duty to indemnify O'Quinn. The court did not address whether Lexington had a duty to defend. O'Quinn filed a motion to alter or amend the district court's judgment, arguing that Lexington had also breached a duty to defend. The district court denied the motion. O'Quinn appealed the entry of summary judgment and the order denying its motion to alter or amend that judgment.

         II

         The parties agree that Texas law governs the excess insurance policy. Under Texas law, if an insurance contract "is worded so that it can be given only one reasonable construction, it will be enforced as written."[1] "However, if a contract of insurance is susceptible of more than one reasonable interpretation, we must resolve the uncertainty by adopting the construction that most favors the insured."[2] "The insured bears the initial burden of showing that there is coverage, while the insurer bears the burden of proving the applicability of any exclusions in the policy."[3]

         "[T]he duty to defend and the duty to indemnify by an insurer are distinct and separate duties, "[4] and the duty to defend is "broader" than the duty to indemnify.[5] Under Texas law, the "factual allegations in the pleadings and the policy language determine an insurer's duty to defend, "[6] but "the facts actually established in the underlying suit determine whether the insurer must indemnify its insured."[7] Texas courts "have long held that 'an award of arbitrators upon matters submitted to them is given the same effect as the judgment of a court of last resort.'"[8]

         This court "review[s] a grant of summary judgment de novo, applying the same standard as the district court."[9] Summary judgment is appropriate only "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."[10] We first consider whether the district court erred in holding that Lexington had no duty to indemnify O'Quinn for any part of the settlement with the Wood plaintiffs.

         A

         The excess policy "follow[ed] form" to the primary policy, meaning the former incorporated the provisions from the latter. The policy obligates Lexington to indemnify "Loss" arising from certain claims. "Loss" is defined as

damages, judgments, settlements, and Defense Costs; provided, however, that Loss does not include fines, penalties, sanctions, taxes, punitive or exemplary damages, the multiplied portion of multiplied damages, reimbursement of legal fees, costs, or expenses, any amount for which the Insured is not financially liable or for which is without legal recourse to the Insured, or matters which may be deemed uninsurable under the law pursuant to which this policy is construed.

         The policy also requires that "Loss" be "for any actual or alleged Wrongful Act" when the act "has been committed by . . . any other person or entity in the rendering or failing to render Professional Legal Services." The policy defines "Professional Legal Services," as pertinent here: "legal services and activities . . . performed as a lawyer . . . [or] Fiduciary." The policy defines "Wrongful Act" to include "an act, error, or omission, including but not limited to breach of contract or duty (including but not limited to Fiduciary duty)."

         The arbitration panel found that O'Quinn's fee agreements with each of the Wood plaintiffs "do not allow for the deduction of BI General Expenses and that certain of the BI General Expenses charged to Plaintiffs were inappropriate." In the latter category, an attorney with an O'Quinn firm conceded that "charging clients for items such as professional association dues, other lawyer's fees, flowers, fundraising, [and] office overhead" was improper, and that the O'Quinn firms had intended at some point to remove any inappropriate charges such as these. However, at the time of the arbitration, they had not done so. O'Quinn's expert also found additional expenses included in BI General Expenses that should not have been included, and testified that more than $1, 000, 000 should be removed from BI General Expenses. But more broadly, the arbitration panel concluded that legitimate BI General Expenses could not be deducted from the Wood plaintiffs' settlement proceeds because "the Fee Agreements do not allow for the deduction of BI General Expenses," and "O'Quinn's actions were not authorized by the Fee Agreements" for such deductions.

         The arbitration panel awarded breach of contract damages to the Wood plaintiffs in the amount of $9, 979, 364 based on the BI General Expenses deductions and the deductions that were not, in fact, BI General Expenses.

         The panel also awarded "attorneys' fees on the breach of contract claim" in the amount of $2, 494, 841, and pre-judgment interest in the amount of $3, 991, 745 "on ...


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